Q2 2014 U.S. Investment Bank Round-Up: Debt Trading

Investment banks around the globe witnessed weak debt trading revenues for yet another quarter in Q2, as tighter regulatory requirements and uncertainty about interest rates weighed on the performance of their FICC (fixed income, currencies & commodities) trading desks. Although FICC revenues saw a notable improvement in the first quarter of the year, the sharp decline in Q2 indicates that most of the Q1 gains were due to the seasonal nature of the global debt industry.

The biggest revenue streams for the country’s biggest banks in the past, FICC trading remains a key source of income for them – although many banks have chosen to reduce their presence in the capital-intensive market of late. In this article, we detail the FICC revenues for Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America and Citigroup over recent quarters and also explain why these operations are still key to their business model over recent years despite the negative impact of stricter regulations.

The table below summarizes the revenues each of the five largest U.S. banks generated through their FICC trading units for each of the last ten quarters. These figures have been adjusted for gains/losses linked to revaluation of the banks’ own debt, as the DVA figures from one quarter to the next are often so drastic that revenues cannot be compared side-by-side without such an adjustment. As the DVA is inherently an accounting-related charge, it doesn’t really influence operating revenues for any period.

(in $ mil)

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

JPMorgan

5,016

3,493

3,726

3,177

4,752

4,058

3,439

3,199

3,760

3,482

Citigroup

4,781

2,861

3,739

2,741

4,623

3,372

2,783

2,329

3,850

2,996

Bank of America

4,130

2,555

2,534

1,788

3,001

2,259

2,033

2,080

2,950

2,370

Goldman Sachs

3,575

2,187

2,449

2,117

3,259

2,431

1,294

1,887

2,835

2,223

Morgan Stanley

2,594

770

1,458

811

1,515

1,153

724

492

1,680

1,024

JPMorgan dominates the FICC trading business, ranking first in 12 of the last 14 quarters. Citigroup did better on only two occasions over this period – Q3 2012 and Q1 2014. Both these banks rely on their geographically diversified operations to increase their share of the debt trading market around the globe. In comparison, Morgan Stanley has shrunk its FICC trading desk considerably since the downturn – choosing to focus on equities trading instead. Morgan Stanley has made more than $2 billion in debt trading revenues just once in the last three years (Q1 2012) and it is also the only bank here to report a quarterly loss in these operations since the downturn (Q4 2011).

The fact that Q2 2014 was indeed slow for FICC trading activities becomes clear from the fact that these banks made $12.1 billion in FICC trading revenues over the period, which is a 20% decline quarter-on-quarter and a 9% drop year-on-year. Each of the banks reported a sequential decline in these revenues, while Bank of America was the only bank to witness an increase in the figure compared to the same period last year.

While the figures above allow for a simple comparison of quarterly revenues across the investment banking giants, this data doesn’t really lend itself to understanding the relative importance of the FICC trading desk in a particular bank’s business model. To facilitate a better comparison, we compiled the following table, which consolidates the figures for the last three years into a single set of average numbers.

(in $ mil)

Total Revenues

FICC Revenues

FICC / Total

Std. Dev.

Std. Dev./ Mean

JPMorgan

24,166

3,779

15.6%

751

19.9%

Citigroup

18,847

3,212

17.0%

861

26.8%

Bank of America

22,146

2,415

10.9%

907

37.6%

Goldman Sachs

8,260

2,348

28.4%

857

36.5%

Morgan Stanley

7,738

1,191

15.4%

725

60.9%

TOTAL

81,157

12,944

15.9%

3,811

29.4%

This table includes the average quarterly revenues each bank reported over the fourteen-quarter period from Q1 2011 to Q2 2014 and has been sorted based on the average FICC revenues earned in a quarter. JPMorgan stands out in this regard – generating $3.8 billion from its debt trading desk. This is more than 15% of the bank’s total quarterly revenues – a sizable portion considering the extremely diversified nature of the bank’s operations. More importantly, JPMorgan has the lowest volatility in revenues as shown by the lowest coefficient of variation (ratio of standard deviation and mean) of just above 20% among these five banks.

On average, these five banks owe just under 16% of their total quarterly revenues to FICC trading – something that clearly shows the importance of their debt trading desks in their business models. Goldman Sachs’ debt trading unit tops the list in this regard as it contributes almost 30% of the investment bank’s total revenues on average. The bank’s FICC revenues are also one of the most volatile among those detailed here, with a coefficient of variation of almost 40%. The considerably smaller size of Morgan Stanley’s debt trading operations also stands out here – although it is important to remember that these operations are still responsible for a sixth of the bank’s total revenues. The bank has been steadily shifting focus from its trading operations to its wealth management division in a bid to draw from the stable revenue stream.

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